Are you ready to explore your options for investing in the new year? Have you considered looking for a less volatile investment than the stock market, but one that offers much greater returns than savings? Enter crowdlending (also called P2P lending), the instrument that allows you to lend to individual borrowers, often many at one time.
While it’s a fairly new concept, it’s taking the investment world by storm. Are you ready to dip your toes in and take advantage of the lucrative returns? Check out the steps to get started below.
How Crowdlending Works
First, let’s understand how crowdlending works. It sounds intimidating, but it’s truly just a platform that you use to choose the loans you’ll invest in. The platform you choose does the hard work for you. All you have to do is choose the loans that you feel comfortable with and watch your earnings grow.
As the name suggests, crowdlending pools money from multiple investors to fund a loan. You can work with platforms that lend directly to borrowers or platforms that only invest in already funded loans (through the originator). You choose how much to invest in each loan and how often you want to invest. You can invest in one loan or hundreds of loans (with minimal amounts).
Select Your Platform(s)
Do your research and choose your peer-to-peer platform wisely. Think about what you want out of the platform. A few things to consider include:
- Minimum investment requirements – Make sure you can meet the requirements both for opening account requirements and the amount you must invest in each loan
- Loan durations – How long do you want to tie your money up? Diversifying between short and long-term loans is ideal.
- Types of loans – What industries do you want to invest in?
- Types of borrowers (originators or direct borrowers) – Do you want to invest in already funded loans or directly to the borrower?
- Buyback guarantee or lack thereof – Does the platform offer buyback guarantees if the borrower defaults for more than 60 days?
- Secondary market or lack thereof – Does the platform offer a secondary market for you to immediately liquidate your investment should you need it?
- The volume of loans – Does the platform offer enough volume for you to invest and diversify as you desire?
- Auto investment programs – Does the platform offer an auto investment strategy that allows you to set it and forget it?
Once you choose your platform, it’s time to sign up. Within a few minutes, you should be ready to start investing. You don’t have to be an accredited investor for most platforms. After entering some basic information, much like you would to open a bank account, you are ready to start investing on the P2P platform.
Of course, you can’t start investing until you transfer money. As a part of the signup process, you’ll link your funding account (typically your checking account). This makes it easy for you to transfer funds to your peer-to-peer platform and start investing.
Each platform has its own requirements regarding the initial amount you must fund your account with upon opening. Pay close attention to the requirements to ensure you can meet them. Once you fund your account, you’re ready to start investing.
You can use your linked account to set up automatic investments on a monthly basis or you can set it for manual investments. Starting off slow is typically best as you get yourself acclimated to the platform.
Now the fun begins – you can start investing! Before you do, get familiar with the platform. How do they categorize loans? What filters can you use to find the loans that you are comfortable investing in? How much are you willing to invest? What is the minimum investment? Find the answers to these questions before you make your first investment.
As a new investor, choose small investments. This gives you time to see how the process works. Check out how you receiving your payments. Are they timely? Do you get answers to your questions right away?
Once you are comfortable, decide what you want to do with your returns. Do you want to reinvest them in more loans or do you want to disburse the funds to your funding account?
Set up an Automated Strategy
Once you have a feel for the process, you’ll want to automate your investing. As you invest more money, you’ll have payments and returns coming at you daily. It could become a lot to manage if you don’t have an automated strategy set up.
Know the platform options and choose the one that works best for you. Do you want to reinvest the principal and interest received or just the interest? Do you need liquidity or is this money purely for investing in your future? These answers will help you decide how to automate your strategy.
Track Your Progress
As you should with any investments, keep careful track of your progress. Most peer-to-peer platforms offer simple dashboards that make it easy to track your investments. Check out how many loans default. If it’s a high percentage, you may want to change your requirements or change how you diversify your investments. You can always change your strategies, such as mixing up your investments in short-term and long-term loans rather than all of one or the other. You can change industries or change originators – the sky is the limit.
The key is to not obsess on your returns right away. As with any investment strategy, crowdlending takes time to show its value. Start small, monitor your returns, and slowly work your way up. Don’t put all of your eggs in one basket regarding types of investments too. Just like you wouldn’t invest all of your money in one stock, don’t invest all of your money in one loan. Diversify your risks and you’ll increase your chances of a profitable return that’s higher than the stock market, money market accounts, or CDs can offer.